Legal Sports Betting Should Be Allowed to Thrive

The WasteWatcher

September 20, 2018 — Spencer Chretien

In May 2018, in Murphy v. NCAA, the Supreme Court invalidated a 1992 law called the Professional and Amateur Sports Protection Act (PASPA), which prohibited most states from legalizing sports betting. (PASPA did not apply to the states of Nevada, Delaware, Oregon, and Montana, where sports betting was legal in 1992.) The Court ruled that PASPA represented an improper exercise of congressional power, as it violated the principle of anticommandeering by “[dictating] what a state legislature may and may not do.” If it wanted to, Congress on its own could regulate, authorize, or prohibit sports betting, but it does not have the power to give orders to state legislatures.

With the decision in Murphy, the ball (or the roulette wheel) is now in the court of state legislatures. And legislators, many of whom realized the benefits of legalized sports betting during the unfortunate days of PASPA, have now jumped at the opportunity to bring this legal, regulated gaming market to their states. Governor Phil Murphy, the named plaintiff in the case, inaugurated the era of legal sports betting in his state with an ill-fated $20 bet on Germany to win the World Cup. Hollywood Casino in West Virginia took its first wager on sports as the summer of 2018 came to an end. It is expected that sports betting bills will represent a significant component of the 2019 legislative sessions in state capitols.

States should be guided by several principles as they move to legalize sports betting and open new opportunities for all participants in the market.

Although legal sports betting is new in America, the field itself is not at all new. One estimate suggests that Americans wager $150 billion on sports betting each year—up until recently, illegally. Other countries, including Australia and the United Kingdom, have long facilitated popular legal sports betting markets. The advantages of legalized sports betting are numerous: it allows for transparency and accountability; robust consumer protections; and fair competition and the innovation that results from it. It creates new jobs. Legal sports betting also raises revenue for state governments without raising taxes.

The American system of federalism uniquely enhances these benefits. Part of the magic of America is the fifty states’ function as the laboratories of democracy—competition will occur not only between casinos and other sports betting services but also between New Jersey and Pennsylvania, Mississippi and Louisiana. Do bets need to take place at brick-and-mortar casinos, or at a race track? Can you place bets on your phone? Can you bet only on the outcome of a game, or will states allow you to take bets on whether the next pitch is a ball or strike? As a legal, regulated sports betting market comes to life, legislators, consumers, and the gaming industry will share best practices and exchange information as they work together to promote a strong gaming environment and tackle any associated challenges.

But there are a few catches. First, as with any new product, some policymakers will be tempted to treat legalized sports betting as a cash cow, as something that exists primarily to provide revenue to fund whatever they want to fund, or as a pot that they can dip into whenever they feel so inspired. They will seek to impose cripplingly high taxes that will drive the business back underground or offshore. Sports betting is a low-margin business, much lower than slot machines or the lottery, and thus is extremely sensitive to any interference of this nature. Punishing a fledgling industry with high taxes is sure to create more problems than it solves. Taxes on sports betting should be low, fair, and predictable.

Another major concern is the possibility that state governments and sports leagues will insist upon a requirement that what they call “integrity fees” are added to the sports betting mix. Leagues spent years opposing legal sports betting and defending the black-market status quo. Now that they have lost their fight, some sports leagues and their allies are urging that the introduction of legalized sports betting guarantee them a cut of the revenue. Simply put, an “integrity fee” would be a tax on each bet, transferring money from the sports book operators to the leagues. The concept was introduced in Indiana, the home of the National Collegiate Athletic Association (NCAA). As the margin for gaming operators is generally about five percent, this one percent integrity fee would dramatically affect the industry’s profit margin, and the costs would be passed on to consumers. Gaming operators would be forced to offer worse odds and fewer perks for bettors. Not as much revenue would go to state governments; they might be more hesitant to lower taxes or provide vital public services.

There is no need for this type of fee to be included in bills to legalize and regulate sports betting. The leagues have no role in the administration of betting, nor is there any reason to believe that this tax is necessary to root out improper behavior by athletes or betting operators. (Why should leagues police themselves?) In other countries with legal sports betting, and in states like Nevada, the process has worked well without these fees: the gaming industry, leagues, law enforcement, and consumers work together to identify and interdict game-fixing and illegal gambling. Advocates of integrity fees want a part of the profits for themselves, despite playing no role in the industry.

A third potential pitfall amid the tremendous opportunity of legal sports betting is the possibility of governmental mandates that would require participants in the gaming industry to purchase data from sports leagues. The sharing of data is a good thing; mandates are not. In August 2018, MGM signed a deal with the National Basketball League (NBA). This arrangement serves as an example of the cooperation that should happen, and is happening, between leagues and the gaming industry. But these deals should be voluntary; regulations stipulating that these agreements must be made would represent a misguided attempt to intervene in the sports betting market. Forcing private parties to do business with each other does not comport with the promise of legal sports betting.

As legal sports betting starts to take off in America, policymakers should keep taxes low, avoid the urge to impose “integrity fees” and unnecessary mandates, and work constructively with all stakeholders to tackle the challenges facing this new market.